Fund Flows Surge as Stocks Party Like It's New Year's

Investors pumped a net $8.4 billion into U.S. equity exchange-traded funds (ETFs) for the week until July 10, the highest inflows since early-January when this year's bull run first gathered momentum, according to new data from research tracker Lipper.

Just one ETF, the SPDR S&P 500, accounted for the lion's share of that money, with net inflows of $5.5 billion, Jeff Tjornehoj of Lipper said in a note on Thursday.

Trading screens lit up after dovish comments by Federal Reserve Chairman Ben Bernanke on Wednesday when he said in a speech in Cambridge, Massachusetts that "highly accommodative policy is needed for the foreseeable future."

The Lipper data however wouldn't have captured more recent equity buying by investors, which helped push the Dow and the S&P 500 to all-time highs on Thursday. The Nasdaq meanwhile logged its best close since 2000.

Asian equities enjoyed a relief rally on Thursday and European shares also rose after strong gains in the previous session.

Stocks have taken just under three weeks to recover from their recent "taper tantrum" which began on May 21 when the U.S. central bank first indicated that its quantitative easing program could be scaled back this year. Bond yields ticked higher in anticipation that the liquidity provided by the Fed - which has so far suppressed interest rates - could be moderated.

The volatility also hit stock markets across the globe. The U.K.'s FTSE 100 fell 12 percent in 22 days before rebounding 7 percent over the past two weeks. The S&P 500 slipped 6 percent in the same amount of time before surging back in just 12 days. Japan's Nikkei 225 tanked 20 percent in 16 days before roaring back 16 percent.

I Don't Want to Get Off the Bus: Pro

Tim Harris, head of Investment at Lloyds TSB Private Bank, tells CNBC that they are happy to stay with the rally as earnings are likely to drive markets forward.

"After reaching a high in late May, the S&P 500 retreated through late June. The May-June pullback is the biggest challenge faced by the U.S. equity market so far in 2013 and, as such, qualifies as a 'drawdown'," the economics research team at Goldman Sachs said in a note on Thursday.

But Goldman said the equity drawdown isn't "the dawn of a new era" of bearishness for stocks. Historically, it takes about twice as long to return to previous peaks as it does to trade down to the trough, the bank said, but added that since late June, Japan, the U.S. and the U.K. seem to be moving even more aggressively back to pre-drawdown levels, while emerging markets continue to lag.

"Broadly speaking, these purely statistical results fit well with our fundamentally driven views that equity markets can ultimately digest the sharp moves higher in global yields, and that U.S. growth in particular is strong enough to sustain the equity market even as policy gradually shifts," Goldman Sachs said.

Last month was a rare losing month for ETFs with U.S. fund outflows topping $10 billion, according to State Street advisors, as investors withdrew $6.2 billion from fixed income ETFs and $6 billion from emerging market ETFs.

But it's not just Goldman Sachs that is feeling positive about stocks. According to Bank of America Merrill Lynch (BofAML), the much talked about "great rotation" - a move into stocks from bonds – which hasn't yet panned out will finally go "mainstream".

"Since the 'taper tantrum' began in May, BofAML private clients have bought $7 billion of stocks, sold $7 billion bonds," the investment strategy team at the bank said in a note on Thursday.

Record bond redemptions and the fall in Apple shares, gold and emerging markets mean that the traditional "safe havens" have been "humiliated", BofAML said, so much so that analysts are beginning to see them as contrarian investment ideas.

BofAML recommends a second-half strategy of "more stocks, less bonds." A view that Giles Keating, head of research at Credit Suisse firmly backs.

"We just have to watch the fixed income complex, don't underestimate the scale of psychological transformation going on here, this was the safe asset, it's no longer safe," he told CNBC Friday.

"Yields are rising; that undermines capital values big time and the money that is going to continue to flow out of there will gradually find its way into stocks."